Eat Poopie and Die

The Super Project: Instructions

Approach: Please provide answers to all the questions below. Keep your answers brief and to the point. For example, answers to questions 2(a) and (b) should each consist of a single spreadsheet printout (e.g., from Excel). If you do the scenario analysis for question 2(c), I do not want to see all the cash flows associated with each scenario, just the end result, i.e., for each (!) possible scenario I want to see one NPV/IRR number. Questions 1 and 3 together should not exceed 1.5 pages.

Important: It must be transparent to me how you have derived your answers. For instance, in your spreadsheet, if row 38 is the difference between row 37 and row 25, you must point this out somewhere (e.g., on a footnote or separate page). Ask yourself if the spreadsheet can be understood by someone (like me) who only has the paper printout but does not have access to the Excel file with the underlying formulas.

Please prepare a cover sheet with the names of all group members. Do not submit floppy disks, CD-Roms, etc. All solutions must be on plain old paper.

Questions:

1) What are the relevant cash flows for General Foods to use in evaluating the Super project? Specifically, should the following cash flows be included? Why or why not?

(a) Test market expenses.

(b) Overhead expenses.

(c) Erosion of Jell-O profits.

(d) Allocation of charges for the use of building and agglomerator capacity.

2)

(a) What are the expected, incremental, after-tax, cash flows of the project? Here I want to see an Excel spreadsheet or similar. Use a tax rate of 52%. Note that the cash flows associated with the "incremental basis" analysis are given in Exhibit 6. While these cash flows are not free of problems, you can still use them. You will have to tackle a number of problems though, e.g., what happens to the tax shield from year 11 onwards? When will the working capital be fully recovered? (Yes, it must be recovered at some point!) These are just a few examples ...

(b) What are the IRR and NPV of the project? Use a discount